Shoppers leaving Wal-Mart Stores these days are used to long check-out lines. In a few years, however, those lines well might be history.

How real is this revolution? And what does it mean for retailers and customers? Experts at Wharton and elsewhere say that RFID is a potentially powerful technology that several organizations--including retailers and government organizations--are seriously looking at implementing to ramp up the efficiency of their supply chains. While companies like Wal-Mart and Target have already announced plans to roll out RFID programs, others are waiting in the wings.

Still, several hurdles remain. One big question is whether the benefits will be immediate or be spread out years into the future. "There's a bandwagon here and a lot of players say RFID is on the brink of having a big impact," says Morris A. Cohen, co-director of Wharton's Fishman-Davidson Center for Service and Operations Management. "But before that, there are technical challenges to overcome."

Fans say that RFID technology promises to revolutionize the supply chain through real-time item tracking. Its goal is to keep goods on the shelves, garner more efficiency through better inventory management, enhance safety through smart recalls and cut theft, known as "shrink" among retailers. This is made possible by the fact that when RFID tags emit radio waves, that information is absorbed by a reader, which can then compile and share it with a company's enterprise software. Suppliers can benefit from real-time inventory management that keeps goods on the shelf. Consumers may not immediately see a lot of major changes, but they would certainly benefit from better in-stock levels.

Wal-Mart's way
Wal-Mart, so far, has been the most aggressive in pushing RFID. Using the clout that comes with $256 billion in annual sales, the company has mandated that its top 100 suppliers use RFID tagging on cases and pallets. Smaller suppliers need to be on the RFID bandwagon by the end of 2006. On April 30, Wal-Mart announced its trials in the Dallas-area were underway with eight of its leading edge suppliers--The Gillette Company, Hewlett-Packard, Johnson & Johnson, Kimberly-Clark, Kraft Foods, Nestle, Purina PetCare Company, The Procter & Gamble Company and Unilever. Some of those suppliers were experimenting with RFID before Wal-Mart issued its edict.

Cases and pallets of 21 products from the eight suppliers are being shipped to Wal-Mart's Sanger, Texas, distribution center and then to seven local supercenters.

A few weeks later, on May 18, Wal-Mart followed up with an update. "To date, no glitches--only positive glimpses of what's to come," said Linda Dillman, executive vice president and CIO for Wal-Mart Stores.

Here are a few scenarios that Wal-Mart says it would like to see beginning in 2005 as it implements RFID on a wide scale. A case of a product leaves a manufacturer and is tracked and instantly routed when it reaches a Wal-Mart distribution center. There's no need to rip open a case and inspect the contents because the RFID reader has already identified the item. At the store, the goods are monitored in real-time so there's no need for inventory. When the shelves are empty, RFID readers alert workers to restock the shelves. If Wal-Mart's inventory is depleted, a replenishment message is automatically sent to the supplier.

"RFID could put more goods on the shelf," says William Cody, managing director of Wharton's J.H. Baker Retailing Initiative. "It would certainly be better than having a skeleton crew walking around filling empty shelves. You could eliminate goods being lost in the back room."

Cohen explains the difference between current inventory management and RFID enabled systems this way: In current systems, you may know there are 10 items on the shelf, and that information is compiled in an enterprise planning software system. With RFID, you know there are 10 items, their age, lot number, expiration date and warehouse origin. "It's like knowing there are 1,000 people in a city," says Cohen. "With RFID, you know their names."

Most of the benefits from RFID at present will be tied to the supply chain and within three- to five-years electronic tags carrying product specific codes should be common, according to EPCglobal, the organization creating standards for the electronic product codes carried on RFID tags.

Despite all the promise surrounding RFID, there are hurdles to be overcome. Collectively, these developments serve as an RFID reality check. "We're not going to see broad-scale deployments overnight even with Wal-Mart's announcement," says Chris Boone, an IDC analyst, speaking at a National Press Club roundtable earlier this spring.

Among the key issues yet to be resolved:

Cost of tags
Depending on whom you talk to, RFID tags cost anywhere from 20 cents to a dollar. To be cost effective, the price of tags needs to fall to 5 cents or so. It's a chicken-and-egg conundrum: If tags were less expensive, there would be more pilots. If more companies were forging ahead with RFID installations, tags would be cheaper.

Meanwhile, big players such as Philips Electronics and Texas Instruments are waiting until the next generation of RFID tags enters the market. Smaller players such as Alien Technology currently dominate tag manufacturing. The price of tags is no small issue. Forrester Research estimates RFID tags represent 80% of implementation costs. "If Wal-Mart and Target can prove the economics, more and more companies will follow and bring the costs down," says Cody.

< Cohen says the importance of tag costs largely depends on the value of the item being tracked. For example, a $3 million Department of Defense missile can still get a benefit even if an RFID tag costs $100 or more. A can of cola needs a tag with a lower price point, say a penny.

Standards in flux
Wal-Mart's mandate requires suppliers to use "Class 0," which are factory programmable only, or "Class 1" tags that can be programmed by the retailer or supplier. EPCglobal is currently working with manufacturers on "Class 2" standards, which will carry more memory and data. Given that Class 2 tags are expected to be more flexible and useful overall, potential suppliers are holding out until those standards are set.

newselement type="table">

That estimate was cut from 60 percent just a few months earlier. The biggest reason: no compelling business case to rush. "Even the obvious benefits--like preventing shrinkage and automating receipt--are out of reach," wrote Overby. Apart from the costs of the tags, suppliers may find that they don't have the technology infrastructure to absorb the data provided by RFID and use it accordingly.

Slap-and-ship approach
Given the large investment necessary to implement RFID and garner benefits from it, Overby recommends Wal-Mart suppliers adopt a "slap and ship" approach. This technique looks at Wal-Mart's mandate as a cost of doing business. The technique: Slap RFID tags on pallets and cases and send them to Wal-Mart as required. The problem is that the supplier to Wal-Mart garners little benefit, but can learn the technology and wait for it to develop further.

To be sure, manufacturers supplying products to retailers that require RFID in the supply chain will have to use it in some form--even in a slap-and-ship format. But being an early adopter may be costly. Cody says there may be more benefits in being a fast follower. The logic: Allow other companies to figure out intricacies such as where to place tags and readers and how to work around the physics of radio waves. RFID signals have trouble penetrating liquid and metal. Some companies have also found it hard to place RFID tags on frozen goods, though fixing them on paper is relatively simple.

Meanwhile, there's little experience in the field when it comes to integrating multiple RFID systems from various partners in the supply chain, notes Overby. To be sure, there will be kinks, but Cohen says RFID has potential to deliver big benefits. "A lot still needs to be done, but the potential is great," he says.

 
To read more articles like this one, visit Knowledge@Wharton.

All materials copyright © 2004 of the Wharton School of the University of Pennsylvania.